Social Security, the cornerstone of retirement for millions of Americans, is edging closer to a financial cliff. Without intervention, benefit payments could be significantly reduced within a decade, affecting seniors who rely heavily on the program.
The Social Security Board of Trustees projects that by 2033, the Old Age and Survivors Insurance (OASI) Trust Fund will be exhausted. At that point, only incoming tax revenue will remain to support payments, covering just 77% of scheduled benefits. As lawmakers debate solutions, experts highlight a mix of revenue increases and targeted cuts that could avert the looming crisis.
Expanding Taxable Income and Adjusting Contribution Rates
One major factor contributing to the funding shortfall is that not all wages are subject to Social Security’s payroll tax. Currently, income up to $184,500 is taxed at a combined rate of 12.4%, split evenly between employers and employees. Any income above that threshold is exempt, creating a cap that limits revenue collection.
According to the Committee for a Responsible Federal Budget (CRFB), applying the payroll tax to all income, regardless of amount, could address 50% of the system’s 75-year funding gap. This single policy shift would significantly improve long-term solvency by increasing contributions from high-income earners, who currently pay tax on only a portion of their earnings.
In addition to expanding the income base, increasing the tax rate itself has been proposed. A modest hike (from 12.4% to 13.6%) would mean workers and employers each contribute 6.8%. This change, according to CRFB estimates, would resolve 31% of the funding shortfall, offering another substantial step toward stability.
These two measures would increase Social Security revenue without directly altering benefit amounts. However, both proposals may face political resistance due to their impact on take-home pay and employer costs, particularly among high earners and business owners.
Adjusting Benefits through Targeted Reforms
While increasing revenue is one path to solvency, the other involves spending reductions. Two proposals stand out for their targeted nature, focusing on those better positioned to absorb benefit adjustments rather than applying broad cuts.
One option is to gradually raise the full retirement age (FRA) from the current 67 to 68. According to CRFB, implementing this over 24 years, by increasing the FRA by one month every two years, would reduce the funding gap by 12%. While this change would affect future retirees, it avoids sudden disruptions and would still allow early retirement at age 62, albeit with reduced benefits.
Another strategy targets high-income retirees. Social Security benefits are calculated using a formula that applies diminishing returns to higher earnings. Currently, only about 20% of earners are affected by the highest bracket. By adjusting the benefit formula so that only 5% of average indexed monthly earnings (AIME) above the third bend point are counted, the system could reduce the 75-year funding gap by 9%, according to CRFB.
Together, these two changes would reduce benefit payouts in a more selective way, protecting lower- and middle-income beneficiaries. They are seen as less disruptive alternatives to an automatic across-the-board 23% cut, which would otherwise take effect if the trust fund is depleted.
If implemented collectively, these four changes, expanding taxable income, raising tax rates, adjusting retirement age, and modifying benefits for high earners, would eliminate 101% of the funding shortfall. According to the CRFB, this would secure the program’s finances for the next 75 years and prevent any need for broad benefit reductions.
